Wednesday, January 14, 2015

PVR to buy Chennai's Sathyam Cinemas for Rs 750-1000 cr

(SPIruns a cinema exhibition, distribution and production business but
are known for their portfolio of some of the most iconic cinema
destinations.)

The
Ajay Bijli led PVR group seems set to acquire Chennai's premier movie
exhibition company SPI Cinemas, popularly known as Sathyam Cinemas, in
what could end up to be the biggest deal in Bijli's career as well for
India's multiplex sector. Multiple sources aware of the on-going
discussions said save last-minute developments, the deal may close for a
rather steep valuation of approximately Rs 750-1,000 crore for just 40
odd screens, located predominantly in the Southern metro. To put this in
perspective, last month Carnival Cinemas paid a little over Rs 700
crore to buy out Anil Ambani's Big Cinemas that has 242 screens across
the country.

This also underscores the growing consolidation frenzy that has gripped
the multiplex industry in recent times - with 5 deals in 12 months,
valued at over Rs 1600 crore --- as theatre operators seek to improve
their bargaining power with film studios and distribution companies to
gain a bigger share of box office receipts. Additionally, with a
prolonged slowdown in commercial real estate (read malls that typically
anchors these multiplexes), dominant players feel inorganic growth is
faster than time consuming greenfield developments.

The SPI Group
currently runs a cinema exhibition, distribution and production
business but are known for their portfolio of some of the most iconic
cinema destinations across South India. According to the company's
website, it currently operate close to 40 screens under 5 categories --
Sathyam, Escape, thecinema, Luxe, their uber premium offering and S2
Cinemas and are poised to open over 50 screens by early 2015. PVR, with
454 screens in 102 locations across 43 cities, is the largest cinema
exhibitor in the country today.

Ajay Bijli, Chairman &
Managing Director, PVR Ltd did not respond to ET's email query. Attempts
to reach him or his top management on their mobiles also did not yield
any result. A company spokesperson declined to comment on market
speculation.

"We are exploring several options to raise capital
and are also in talks with several PE players. We have not taken any
final call on the future course of action. A sale is an option but at
this moment I have nothing to comment about on any valuations or
potential discussions as nothing has firmed up yet," Kiran Reddy, Chief
Executive Officer of SPI Group told ET. Sources add that they have been
in the market for almost a year now and have been sought after by most
of their peers. While most discussions fell through with the Reddy's
insistence on a significant valuation premium, PVR has pursuing the
opportunity for months now. PWC and EY are believed to be advisors in
the deal.

Earlier in December, newspaper reports had said that the two sides were in negotiations

JEWEL IN THE CROWN
What makes SPI Cinemas such a prized catch despite a small portfolio of
just 40 odd screens that are largely concentrated in just 1 city -
Chennai. For one, it is amongst the most profitable operators today with
one of the highest average occupancy - over 65% -- anywhere in the
country. It draws over 3 million customers a year. One of the sources
mentioned above said the Reddy family owned chain is expected to post an
Rs 85-88 crore EBITDA by the end of this financial year. Recent
multiplex transactions in India have been sealed at 10-12 times EBITDA
multiples, almost double that of global averages. As per data available
from the registrar of companies, in FY 14, SPI Cinemas posted around Rs
39 crore of EBITDA on revenues of Rs 189.4 crore. The company had Rs 186
crore of debt then.

With legacy real estate in their possession, most are expecting some of
the prime properties of SPI Cinemas to also be included in the deal. It
also gives PVR a very strong footing in the movie crazed Chennai market
- home to some of the biggest movie stars from Kollywood. "It is a
perfect, high impact buy for PVR. It gives them access into a movie
crazy city which sees an average occupancy of 65-70%, while Sathyam sees
an occupancy of close to 85%. This is because the Reddys' have not only
built a class complex, they run it very efficiently," said a local
exhibitor from Chennai.

Smart yet reticent, the Reddy's
never thought of cinemas as their core business interest and in fact in
the early 80's had even thought of demolishing their 1st three-screen
movie theatre to pursue the core real estate ventures. But riding on the
multiplex mania, they transformed their dowdy company into one of the
most premier exhibition companies in Asia with several cutting edge
technological breakthroughs and frills that include touch screens to
order tickets, monster Macs to browse, a spa, lavish F&B and gaming
zones and a new luxury lounge. "A decade ago, even with just 8-9
screens, they had the foresight to hire a foreign CEO to focus on
operations and profitability," added the official from Chennai.

But retaining pricing power at a time when the sector is on the throes
of massive shakeout - the top two national players PVR and Inox control
50% of the total 1600 multiplex screens in the country - was becoming
difficult. These national rivals along with global players like
Cinepolis with deeper pockets were also chipping into SPI's bastion in
Chennai.

For PVR too, inorganic growth works the best for a
market like Tamil Nadu which has a cap on Rs 120 on ticket prices.
"Inorganic route to expansion in areas where a chain is not present can
be a very efficient strategy in a theatrical distribution business.
While premiums will need to be paid for central locations, permissions
obtained and ready infrastructure, it can still prove to be a better
expansion strategy as compared to going greenfield. Further, one also
eliminates an existing competitor from the landscape," said Smita Jha,
Leader- Entertainment & Media, PricewaterhouseCoopers.

Some however do feel that PVR was left with no choice having lost out
earlier on the Big Cinemas deal to Carnival. Last July, the number 2
player Inox scooped up Delhi-based Satyam Cineplexes for Rs 182 crore
thereby expanding its presence to 50 cities, with 91 multiplexes and 358
screens. Having missed a few chances in the past, PVR's last
acquisition was in November 2012, when it had bought out the promoters
of Mumbai-headquartered Cinemax for Rs 395 crore.

It however
remains the most aggressive player opening 33 screens in the first half
of this fiscal and expects to open 65-70 more during the rest of the
fiscal. According to a November research report by Standard Chartered
Securities, PVR has taken an enabling resolution to raise Rs 500 crore
in equity to fund inorganic growth opportunities. However the same note
cautioned "While not averse to an inorganic growth strategy, we believe
any irrational acquisition will lead to a significant de-rating of PVR."
For FY 2014, on a consolidated basis PVR reported revenues of Rs 1358.8
crore, EBITDA of Rs 226.2 crore & PAT of Rs 50.39 crore.